Will the Brexit Vote Be the Boost Stocks Need?

Will the Brexit Vote Be the Boost Stocks Need?


The relative quiet in the market right now is all about the Brexit. Investors and traders are closely watching the vote on June 23. For now, the latest polls are pretty evenly split between the “Leave” and “Remain” camps. But the risk of a "Leave" result, which would take the United Kingdom out of the European Union, has many fearful of the economic and financial market ramifications.

The stalemate caps a three-month sideways crawl for stocks, which in turn, caps a three-year sideways crawl as the Dow Jones Industrial Average continues to trade near the 18,000 level first reached on Christmas Eve 2014.

Until there is a resolution, stocks aren't going anywhere as greed and fear are finely balanced.

Related: Who's Really to Blame for Europe's Brexit Mess

On the downside, bears are focused on U.K. voters who have been warming to the idea of leaving the EU out of anger over issues such as immigration, deflation, economic stagnation and the bureaucracy of Brussels.

Well-known currency trader George Soros warned of the dangers of Brexit in an op-ed in the Guardian, saying a leave result would cause "bigger and more disruptive" pound sterling devaluation than the 15 percent drop that occurred on Black Wednesday in 1992.

How bad could it be? Morgan Stanley warns British stocks could lose nearly 20 percent in a Brexit win scenario. Bank of America Merrill Lynch believes U.S. stocks could lose upward of 7 percent. Citigroup sees European stocks down 20 percent. Deutsche Bank sees 10 percent downside risk.

Bulls, on the other hand, are focusing on the fading odds of a Brexit following the tragic murder of a pro-Remain MP last week. Bookies put the odds of Brexit at around 20 percent.

Related: How a Brexit Could Sink Clinton and Hand the Election to Trump​​​

Moreover, any financial market fallout is likely to be short-lived and focused on European bond and equity markets. Keep in mind: Major central banks are already preparing for coordinated liquidity injections.

At this point, Brexit looks like a distraction; the real reason stocks have been mired in a long trading range is a lack of clarity on issues such as the ongoing corporate earnings recession, uneven economic data, pressure on Japanese and European banks from negative policy rates and the lingering question of whether the Fed is serious about its two-quarter-point rate hike forecast for 2016.

Sure, there have been skirmishes and isolated offensives.

The bulls pushed hard on energy stocks and crude oil out of the February low, driven by short-term supply disruptions (Nigeria, Libya) and the oft-repeated rumors of an OPEC-Russia oil production freeze deal. More recently, the bears have been targeting bank stocks as safe haven inflows into long-term government bonds have pressured net interest margins.

^DJI Chart

^DJI data by YCharts

But overall, charts of the major averages look like World War I battlefields. Trenches have been dug in: The bears are defending Dow 18,000 while the bulls are dug in near 17,500.

Related: Why Clinton or Trump Could Face a Stock Market Nightmare​​​

As time goes on, the relative calm is becoming increasingly uneasy. A breakout looks imminent. We just need a catalyst, such as a surprise Leave victory, a surprise rate cut or a batch of poor Q2 earnings when reporting starts in July.

Options traders are preparing for a negative surprise by bidding up protection against a selloff. That's boosted the CBOE Volatility Index (VIX), known as Wall Street's "fear gauge," in recent days. The result has pushed up the value of near-term VIX vs. "normal" medium-term VIX by the most since last August's market selloff driven by China's surprise currency devaluation.

Will the Brexit Vote Be the Boost Stocks Need?